Tread carefully when you step down


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This article was published in Construction News on 1 December 2016.

Stepping down relevant clauses to subcontractors is rarely quick and easy when done properly – but it’s worth taking the time to do so.

Let’s take a familiar scenario: an employer engages a contractor to carry out works, but the finished works are already subject to agreements for lease between the employer and future tenants of the finished project.

The terms of the agreements for lease are likely to contain duties relating to the performance of the works. Some common examples include:

  • practical completion conditions;
  • the provision of collateral warranties or third party rights;
  • liquidated damages;
  • deadlines for practical completion and access prior to completion (e.g. to fit out a retail unit); and
  • maximum and minimum area limits which, if not adhered to, allow the tenant to terminate the agreement for lease or entitle the tenant to a reduction in rent and/or liquidated damages.

The employer will seek to ensure that the building contract includes these duties, so that there is no gap between the liability of the employer and the liability of the contractor in relation to the same.

This is an important exercise because the employer is liable for its own breach of the agreements for lease and any breach of these agreements by the contractor.

Likewise, when the contractor engages a subcontractor to perform part of the main contract works it is responsible to the employer for any breach of the main contract by its subcontractor.

Different steps

Both the employer and the contractor will try to address their potential exposure by ’stepping down’ the relevant terms of the agreements for lease into the main contract (in the case of the employer) and the relevant terms of the main contract into the subcontract (in the case of the contractor).

Employers and contractors tend to approach this task in one of two ways:

  • by using ’third party agreement’ clauses, whereby the contractor or subcontractor warrants to exercise reasonable skill and care not to put the employer or contractor in breach of any of its obligations under third party agreements, and indemnifies the employer or contractor for any breach. The contract will generally identify the relevant third party agreements and confirm that copies have been provided;
  • by reviewing the third party agreements, identifying which provisions need to be stepped down and then drafting each provision into the main contract or subcontract.

Contract clauses

Third party agreements clauses are amongst the most common amendments to main contracts and are already present in popular standard form subcontracts such as the 2016 editions of the JCT Sub-Contract forms, and have been for some time.

For example, clause 2.5 of the JCT SBCSub/D/C/ 2016 states that:

“Insofar as the Contractor’s obligations under the Main Contract…relate and apply to the Sub-Contract Works or any part of them, the Sub-Contractor shall observe, perform and comply with those obligations…and shall indemnify and hold harmless the Contractor against and from…any breach, non-observance or non-performance by the Sub-Contractor or his employees or agents of any of the provisions of the Main Contract; and any act or omission of the Sub-Contractor or his employees or agent which involves the Contractor in any liability to the Employer under the provisions of the Main Contract…”

These clauses are intended to provide employers and contractors with recourse against the contractor or subcontractor in the event that a term of the lease or building contract is breached by a party other than themselves.

However, whilst third party agreements clauses are commonplace, they do not necessarily provide the blanket protection that employers and contractors think they provide.

Risk analysis

The gap between the expectation of the employer and/or contractor and the reality in practice is potentially vast due to several factors, including the following:

  • it is common for copies of third party agreements to be redacted. To the extent that such redaction renders provisions unclear, confusing or incomplete, it is difficult to believe that a court would enforce them; and
  • many obligations do not neatly import themselves into the building contract or subcontract, or may result in conflicts between terms set out in the building contract or subcontract. For example, dates for completion, conflicting practical completion requirements or conflicting insurance requirements.

Third party agreement clauses are easy and quick to draft into contracts and subcontracts, and all parties have become accustomed to them.

Performing a comprehensive risk analysis and properly stepping down the relevant clauses is rarely quick and easy. However, it is best practice to perform such an analysis in order to establish any potential gaps in liability and then draft the relevant obligations from third party agreements into the building contract and/or subcontract to fill such gaps.

This will take time but the result is that:

  • all parties are clear about their obligations (and will likely have the opportunity to discuss and understand them); and
  • the employer and/or the contractor can be sure that these obligations have been properly incorporated into the terms of the building contract and/or subcontract.

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